Covered Bonds

Banking funding rules should have diversity and stability in mind, and steer clear of favouring one funding format over another. But a Basel consultation document on the Net Stable Funding Ratio published this month promotes the exact opposite, and will make bank funding less stable.

The Swedish Bankers Association reckons the Net Stable Funding Ratio (NSFR) would cause banks to rely less on covered bond funding and more on alternative sources that are not as stable.

The recent correction in multi-cédulas following Standard & Poor’s rating downgrades last week has almost run its course. Though there is a slight risk that month-end portfolio re-balancing will provoke further near-term losses, the longer range picture is fundamentally and technically well supported.

Bank of Montreal’s (BMO's) covered bond programme was recently signed off by the Canadian Mortgage Housing Corporation (CMHC), giving rise to speculation that it could return to the covered bond market after Easter with a newly set-up programme and a legally compliant covered bond deal. A still-favourable cross-currency swap suggests it could become the fourth Canadian bank to issue in euros this year.

Bank demand for covered bonds could be restricted as a result of new proposals on large exposures set out by the Basel Committee on Banking Supervision (BCBS) which are set to come into effect in January 2019.

Banco Santander Chile has issued a new deal from its covered bond programme, Fitch said on Wednesday.

Depfa ACS covered bonds tightened by 30bp on Thursday morning, after German press reports fuelled speculation that it would not be sold to an unrated buyer, but would remain in the hands of the German government. As Depfa’s bonds have a higher rating than other domestic Irish covered bonds, they have potential to tighten much further, bankers told The Cover on Thursday.

The recent correction lower in Multi-Cédulas following Standard & Poor’s rating downgrades last week has almost run its course. Though there is a slight risk that month-end portfolio re-balancing will provoke further near-term losses, the longer range picture is fundamentally and technically well supported, bankers told The Cover on Wednesday.

There are a few transactions that could potentially be announced at short notice as, despite continuing geopolitical strains, market conditions remain strong, bankers told The Cover on Tuesday. However, with clients away from their desks, overall activity is likely to remain muted.

The European Banking Authority proposed this week that covered bond new issue swaps should receive special treatment, ending months of uncertainty over derivatives proposals that could have delivered a fatal blow to the covered bond market.

Covered bonds are currently exempted from large exposure rules set out in the fourth iteration of the capital requirement directive. But this could change in 2019, if newly released proposals set out by the Basel Committee on Banking Supervision (BCBS) are put into place. Though the restrictions will reduce the appeal of covered bonds, it should not be a problem in practice for most countries except Denmark.

The Swedish Bankers Association has published a letter to the Basel Committee on Banking Supervision which says that the Net Stable Funding Ratio (NSFR) would cause banks to rely less on covered bond funding, and more on alternative sources which are not as stable.